In France, Relief Over Rafale Sale to Egypt

PARIS — France appears to have won precious time on the Rafale program, with Egypt buying the twinjet fighters in an arms package worth €5.2 billion (US $5.9 billion), relieving domestic budgetary pressure.

Egypt has decided to buy 24 Rafale fighter jets and a multimission frigate, with a contract signing to be held in Cairo on Feb. 16, President François Hollande said in a Feb. 12 statement.

A big question on the deal is, who pays for the weapons, asked said defense specialist Pierre Conesa. Has France or Saudi Arabia provided loans or underwritten the financing, he asked, noting the lack of details? he said. There are no details on the financing of the package, he said.

The Egyptian economy has been under pressure for three years, amid deep social unrest and a sharp fall in tourism. There has also been concern over hHuman rights issues and the Army's ejection of the government have raised concerns overseas.

"The Egyptian authorities have informed me today of their intention to acquire 24 Rafale combat aircraft and a multimission frigate as well as related equipment," Hollande said. "This equipment will allow Egypt to increase its security and play fully its role in promoting regional stability.

"In this way the Rafale combat aircraft wins its first export contract.

"The state has been fully engaged in the negotiations and by implication permits the closing of this contract."

The signing is due Feb. 16 in Cairo and Defense Minister Jean-Yves Le Drian will sign for France, Hollande said.

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The sale is worth €5 billion-€6 billion and concludes detailed talks begun in December. Egypt is keen to fly the Dassault Rafale and sail the DCNS multimission frigate at the opening of a new waterway on the Suez Canal in August.

The deal will bring in some cash more quickly for Dassault with the down payment, but the net effect on the share price is "not very, very significant," said Yan Derocles, analyst at brokerage Oddo Securities.

Annual production of the fighter will stay at 11 units a year, perhaps one or two more, so the Egyptian order will likely have a marginal effect on the business volume, he said.

For budgetary reasons, the The French government had for budgetary reasons planned to cut delivery of the Rafale to the Air Force and Navy from 2016 and needed export orders to maintain the minimum annual output of 11 aircraft. France plans to deliver 26 Rafales to the services under the present 2014-19 military budget law.

"This is good news for Dassault, and therefore for the French military aircraft industry: it breaks the drought for Rafale orders, and should drive production rates usefully higher from the recent bare-bones levels for France," said Sash Tusa, analyst at Edison Investment Research.

"It could also apply some useful leverage in negotiations with India," he said. "In effect, this pushes that country down the priority list for Rafales delivered direct from France." he said.

Questions remain There are questions to be asked on what undertakings France gave for securing the contract, as the Egypt this is deal is just "perfect," a defense analyst said.

Hollande said on Feb. 12 that France had "made some effort" on prices and financing when the Egyptian officials came to Paris to discuss the arms package, France Inter radio reported. Hollande agreed to the essential elements with his Egyptian counterpart, Abdel Fattah el-Sisi, when they met at the funeral of the Saudi King Abdullah last month, the radio reported.

On the Rafale, if a second export client were to sign up, that would likely pose a problem for raising the output and require fresh investment to expand the manufacturing, the specialist said. France is in talks with India for the sale of 126 fighters and Qatar for a potential order for 24 and options for 12 more.

For Dassault, the Egypt signing is very much welcomed.

"I would like to thank the highest Egyptian authorities for this strategic and historic partnership. Dassault Aviation will be equal to the faith that they have placed in us yet again," Eric Trappier, chairman of Dassault, said in a statement.

"I would also like to thank the French authorities, which were behind the Rafale program, and have provided the political support, without which we cannot make any military exports," he said.

Trappier paid tribute to the 7,000 personnel working on the Rafale at Dassault, Thales, Safran, and 500 subcontractors.

France plans to send over two or three fighters and the warship under Egyptian colors for the opening ceremony. The vessel will be the Normandie frigate, which DCNS had built for the French Navy.

MBDA air-to-air Mica missiles and Aster 15 surface-to-air weapons for the frigate are part of the deal, a French official said. Maintenance is also included in the package.

There is a contract for Lacroix, which produces decoy flares, specialist website Secret Défense reported. The Rafales will be capable of carrying the Black Shahine, an export version of the Scalp cruise missile, the website said.

France delivered the Black Shaheen to arm the Mirage 2000-9 for the United Arab Emirates, and limited the missile's range to 350 kilometers to conform with the US Missile Control Technology Regime, a second official said.

The Rafale, frigate and missiles will be covered by specific contracts rather than a global contract, the first official said.

The estimated total price would be €5 billion-€6 billion, of which Egypt will would pay for half of the total deal using its own funds, with the other half financed by bank loans, the official said.

The bank loans will be insured by Coface, the French state-backed export credit guarantee department, the official said. That 50:50 ratio of payment reflects the guidance set by the Organization for Economic Cooperation and Development.

Theat Coface insurance means the French government would repay banks and manufacturers if Egypt fell into payment problems on the loans.

The size of the down payments would differ for the fighters, frigate and missiles as the amount depends on whether the platform is built or not. As the Normandie frigate is built, the down payment would be larger than the standard 15 percent.

The priority for Rafale production is the two-seater B model to form a second Air Force nuclear squadron, French procurement chief Laurent Collet-Billon told journalists on Feb. 9.

The A first delivery of the Rafale for Egypt would be in 2018, as three years are needed to build the plane, Collet-Billon said. Once a down payment is received, the contract goes into effect, he said.

BNP Paribas, Credit Agricole and Societé Générale are the banks raising the bank loans for the Egypt contracts, French media have reported.

Saudi Arabia, Kuwait and United Arab Emirates have pledged to deposit $10 billion in Egypt next month, according to news website Al-Youm Al-Sabea, Reuters reported on Feb. 5.

Saudi Arabia has also sent Lebanon $3 billion to buy arms from France.

The Saudi backing is intended to bolster those nations against the Islamic State group ISIS Islamist fundamentalists fighting in Iraq and Syria.

The Egyptian Air Force is equipped with F-16, and Mirage 5 and 2000 fighters, and the Navy sails US-built frigates. In July, Washington held up last July the delivery of four F-16 fighters, seen as a show of discontent to the Egyptian Army's removal of the then-President Mohamed Morsi.